Tax Free Savings Accounts

“To (contribute) or not to (contribute), that is the question.”
–  The Tragedy of Hamlet, Prince of Denmark, Act III, Scene I, written by William Shakespeare;
(the word “be”  replaced with contribute)

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

What is a TFSA?

A Tax Free Savings Account, or TFSA, is a Canadian government approved investment account designed to encourage you to save tax effectively for your needs.

Contributions to a TFSA are not deductible in computing income for tax purposes.  However, the income and gains (or losses) on investments held within a TFSA are not included in computing income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits[i].  And withdrawals from a TFSA are also tax-free[ii].

Contribution Limit

TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and resident in Canada[iii].  You will be able to make total TFSA contributions up to the contribution limit that you have available.

You will accumulate TFSA contribution room for each year even if you do not file an income tax and benefit return or open a TFSA[iv][v].


TFSA Annual Limit

















Cumulative Total


NOTE:  The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500.

Unused contribution room will be carried forward to future years.  For example, if you contribute $2,000 to a TFSA in 2009, your contribution room for 2010 will be $8,000 ($5,000 for 2010 plus the $3,000 carried forward from 2009).  There will be no limit on the number of years that unused contribution room can be carried forward.

Any amounts withdrawn from your TFSA in a year will be added to your contribution room in the following year[vi].  This will give you the ability to re-contribute an equivalent amount in the future[vii].

Excess contributions are subject to a penalty tax of one percent per month.

Qualified Investments

A TFSA can hold the same investments as a Registered Retirement Savings Plan (RRSP).  The RRSP qualified investment rules accommodate a broad range of investments including, for example, mutual funds, publicly-traded securities, government and corporate bonds, guaranteed investment certificates and, in certain cases, shares of small business corporations.

“In kind” Contributions

You can make “in kind” contributions (for example, securities you hold in a non-registered account) to your TFSA, as long as the property is a qualified investment[viii].

You will be considered to have disposed of the property at its fair market value (FMV) at the time of the contribution.  If the FMV is more than the cost of the property, you will have to report the capital gain on your income tax return.  However, if the cost of the property is more than its FMV, you cannot claim the resulting capital loss.  The amount of the contribution to your TFSA will be equal to the FMV of the property.

Withholding Tax on Foreign Income

As a TFSA is typically not viewed to be a qualified pension plan, income from foreign investments within the TFSA is likely subject to withholding tax which is usually not recoverable.  This can make foreign income paying investments less competitive to a Canadian investment where there is no withholding tax.

The withholding tax rate and any exemptions available depend on the tax treaty that Canada has signed with the country where the company issuing the investment is located.  For example, the withholding tax rate on dividends for U.S. stocks and American Depository Receipts (ADRs) is 15 per cent[ix].

Income Attribution Rules

If you transfer property to your spouse or common-law partner, the income tax rules generally treat any income earned on that property as your income.  An exception to these “attribution rules” will allow your spouse to take advantage of the TFSA contribution room available to him or her using funds provided by you: the rules will not apply to attribute income earned in a TFSA back to you.

Treatment on Death

When you die, your TFSA from the date after your death loses its tax-exempt status.  In other words, investment income and gains that accrue after your death will be taxable, while those that accrued before your death will remain exempt.

A TFSA permits you to designate a beneficiary whereby the TFSA assets bypass your estate thereby avoiding probate and legal fees.

Where you designate your spouse or common-law partner as the successor account holder (and he or she survives you), the account will maintain its tax-exempt status.  In effect, the TFSA continues with your surviving spouse as now being the owner of the TFSA and any income or gains continues to grow on a tax-exempt basis.

If you name a beneficiary someone other than your spouse or common law partner, future tax-exempt growth is lost, but you’ve at least avoided probate and legal fees and any delay to transfer assets.  The financial institution[x] would require receipt of your certificate of death and a letter of direction to transfer the TFSA assets to the designated beneficiaries.

Transfers on marriage breakdown

On the breakdown of a marriage or common-law partnership, an amount may be transferred directly from the TFSA of one party to the relationship to the TFSA of the other.  In this circumstance, the transfer will not re-instate contribution room of the transferor, and will not be counted against the contribution room of the transferee (the recipient).


An individual who becomes non-resident will be allowed to maintain his or her TFSA and continue to benefit from the exemption from tax on investment income and withdrawals.  However, no contributions will be permitted while the individual is non-resident, and no contribution room will accrue for any year throughout which the individual is non-resident.

U.S. Citizens, U.S. Residents or Greencard Holders

If you are a U.S. citizen or U.S. resident, you should seek advice from your U.S. Tax accountant as a TFSA is not considered a qualified pension and may be disregarded for U.S. tax purposes (i.e. it might be viewed like a Grantor Trust).  As such, the TFSA may be subject to adverse U.S. income and estate tax consequences.

Should you contribute to a TFSA or RRSP?

If you do not have enough to contribute the maximum to both an RRSP and TFSA, the choice of which to contribute to will depend on your particular circumstances.  The important factors that impact the decision include:  (i) the particular use of the funds, (ii) your marginal tax rate at the time of contribution, and (iii) your marginal tax rate at the time of the anticipated withdrawal.

Where your marginal tax rate at the time of contribution is the same as the time of withdrawal, the contribution to an RRSP or TFSA may have almost equivalent results.

It may make better sense to contribute to an RRSP where:

  • the marginal tax rate for RRSP withdrawals will be lower than the marginal tax rate when contributions are made; or
  • you are planning to buy a home (qualifying withdrawal for the $25,000 Home Buyer Plan) or attend a post-secondary educational institution (where the withdrawal will be a qualified withdrawal under the Lifelong Learning Plan).

It may make better sense to contribute to your TFSA if:

  • you expect the marginal rate at the time of withdrawal will be higher than the marginal rate at the time of contribution; or
  • you anticipate that RRSP withdrawals in retirement may cause the loss of Guaranteed Income Supplement (GIS), a clawback of your Old Age Security or a reduction in other benefits (eg. like increasing your payment threshold for BC PharmaCare benefits where the government pays the cost on eligible prescription drugs and medical supplies).

The Next Step

To help develop your estate plan including beneficiary designations for your TFSAs, RRSPs and RRIFs, please contact our financial planner, Steve Nyvik.  He will work together with your estate planning lawyer to help custom design and implement your estate plan.  Estate Planning is included as part of the service for Steve’s clients of Lycos Asset Management Inc.  Steve can be contacted by calling: (604) 288-2083 or by email:


[i]       In other words, income or gains within the TFSA or withdrawals from a TFSA have no impact on income tested benefits and credits including Old Age Security (OAS), the Guaranteed Income Supplement (GIS), Employment Insurance (EI) benefits, Canada Child Tax Benefit (CCTB), the Goods and Services Tax Credit and the Age Credit.

[ii]      Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible.  There is no prohibition in the Income Tax Act on an individual’s ability to use their TFSA assets as collateral for a loan.

[iii]      A person determined to be a non-resident of Canada for income tax purposes can hold a valid SIN and be allowed to open a TFSA; however, any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account.

[iv]      The TFSA dollar limit is not prorated in the year an individual:

  • turns 18 years old;
  • dies; or
  • becomes a resident or a non-resident of Canada.

[v]      There is no lifetime limit to the amount of contributions.

[vi]      You must keep records on your TFSA transactions to ensure that you do not exceed your TFSA contribution room.  The Canada Revenue Agency (“CRA”) will receive from your financial institution, where you have a TFSA, information each year as to contributions and withdrawals.

You can request from the Canada Revenue Agency a TFSA Room Statement.  You can also log into your CRA online account to obtain your contribution room based to the end of the previous tax year.

[vii]     The easiest way to establish a record of your TFSA contribution room is to file a tax return annually, even if you have no taxable income.  Your TFSA contribution room can then be seen through Canada Revenue Agency’s My Account or Quick Access e-services, or you can phone CRA to get the balance.  However, the amount reported will only be correct as of January 1st of each year, after financial institutions have reported all TFSA transactions for the prior year, which may not be until the end of March.

[viii]     You cannot exchange securities for cash, or other securities of equal value, between your accounts, either between two registered accounts or between a registered and a non-registered account (these transactions were known as swaps).

[ix]      You may be required by your financial institution to file IRS Form W-8BEN-E in order for the withholding tax to be reduced from 30% to 15%.

[x]      Financial institutions eligible to issue RRSPs will be permitted to issue TFSAs.  This includes Canadian trust companies, life insurance companies, banks and credit unions.

Steve Nyvik

Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P. WHAT I DO: Steve builds, from blue-chip dividend paying stocks and bonds, a tax efficient 'pension' designed to meet your needs through time without taking unnecessary risk. Financial planning advice and service are included to make sure that if ‘life happens to you’, your goals aren’t derailed in the process. Phone: (604) 288-2083 (extension 2) Toll Free: 1 (855) 855-9267 (extension 2) Email: